High Tech Corp. cut its research and development budget in 2010 by $4,

High Tech Corp. cut its research and development budget in 2010 by $4,000,000 in order to
improve its cash flow for the year. Which of the following statements is MOST correct?

A) The stock price will likely increase because the value of stock is based on reported cash flow.
B) The change will have no impact on stock price because the company’s profits will not change
in 2010.
C) The stock price will increase only if reported profits in 2010 are higher than profits reported in
2009.
D) The stock price may decrease because investors may predict that future cash flows will
decrease due to the lack of innovation and new products.

ANSWER

D